Maiden mandatory prices at the mids; deal eyed as cheap ahead of terms; Rallye prices

By Rebecca Melvin

New York, Sept. 25 - The mandatory convertible preferred offering of Maiden Holdings Ltd. was upsized Wednesday to $150 million and priced at the midpoint of talked terms after the market close for a 7.25% yield and a 25% initial conversion premium.

The Maiden deal was looking fairly cheap ahead of final terms being fixed, market players said. They thought the deal was several points cheap at between 18% to 22% vol.; and given the scarcity of new paper, some thought the deal was likely to be played by both outright and hedged players despite the fact that the three-year, set strike structure has traditionally appealed to outrights.

"I think now people are willing to take a shot at anything," a New York-based trader said.

The Maiden deal is the second mandatory to price in the convert space in the last few days.

On Friday, NextEra Energy Inc. sold $500 million of three-year mandatory convertible equity units at a discount to their $50 par in a registered, overnight deal.

But new convertible bonds have been absent this week. In fact, the perception is that U.S. convertible issuance has tapered off in September despite expectations to the contrary, and investors are "starving" for more paper, a New York-based trader said.

But market conditions are not particularly favorable for convertible issuers right now, particularly for issuers of convertible bonds, another source said.

Mandatories are a source of "opportunistic financing" that has materialized for certain issuers, but bond wise, Treasury yields have contracted and spreads are tight again, so it's not good for converts, the source explained. Meanwhile, stocks are in a rough patch, which generally depresses convertible issuance, the source added.

Internationally, the situation is similar, but there has been a somewhat steady flow amid many calls and redemptions.

On Wednesday, France's Rallye SA launched and priced €375 million of exchangeables with a 2.25% yield to maturity and an initial conversion premium of 30%. The 1% bonds are exchangeable for existing shares of Casino, Guichard-Perrachon SA, and they priced at the rich end of talk.

Back in established U.S. issues, Portfolio Recovery Associates Inc.'s 3% convertibles, which priced in August, traded a little higher outright on Wednesday with the underlying shares of the Norfolk, Va.-based business and financial services company up nearly 1%.

Elsewhere, Exelixis Inc.'s 4.25% convertibles due 2019 traded actively between 115.25 bid and 115.75 offered, according to Trace data, with shares of the San Francisco-based developer of therapies for cancer and other serious diseases up nearly 1%.

The dual tranches of Cubist Pharmaceuticals Inc., which priced earlier this month, generally see good two-way flow, a market source said, and the Cubist 1.125% convertibles due 2018 were offered early on Wednesday at 109, while the Cubist 1.875% convertibles due 2020 were offered at 107.5 with the underlying shares of the Lexington, Mass.-based biopharmaceutical company edging up through the session, ending 1.9% higher.

The 3.875% convertibles of Limerick, Pa.-based medical device maker Teleflex Inc. were in the market at about 140 versus an underlying share price of $81.70, a market source said.

Maiden looks cheap

The planned Maiden $135 million mandatory deal was seen more than 2 points cheap at a 22% vol., according to a Connecticut-based analyst, while a New York-based trader said that the new deal looked "in line with the NextEra mandatories that priced last Thursday at a distribution rate of 5.799% and an initial conversion premium of 20%.

The Maiden paper looked fairly cheap using a credit spread of 400 basis points over Libor and vol. at 18% for the lower strike and 22% for the upper strike, according to a New York-based trader.

A syndicate source quoted valuation inputs for the deal at 500 bps to 525 bps with a 20% vol.

Maiden, a Hamilton, Bermuda-based reinsurance holding company, is an investment-grade credit with a $1 billion market capitalization, the syndicate source said.

The three-year preferred shares, with $50 par, were talked to yield 7% to 7.5% with an initial conversion premium of 22.5% to 27.5%.

Maiden common shares dropped 71 cents, or 5.4%, to $12.41 on Wednesday after the deal was launched late Tuesday.

There is a $15 million greenshoe for the deal, which was being sold via joint lead managers Goldman Sachs & Co., Morgan Stanley & Co. LLC and BofA Merrill Lynch.

Proceeds will be used for general corporate purposes, primarily to support continuing growth of the company's reinsurance operations, with remaining proceeds to be invested in marketable fixed income securities and short-term investments.

"We don't traditionally trade mandatories; but it looks fine. It's not a great structure unless it gets really cheap," a source said.

The company has two other existing preferreds with 8.25% dividends and an 8% perpetual preferred.

Rallye prices

Rallye launched and priced €375 million of 1% seven-year bonds at par that are exchangeable for existing shares of Casino, Guichard-Perrachon. The bonds have a 2.25% yield to maturity and an initial conversion premium of 30%.

Pricing of the Regulation S deal was at the rich end of talk, which was for a redemption price between 109.36% and 113.31%, a 2.25% to 2.75% yield to maturity and 25% to 30% premium.

Barclays' London-based convertibles research team published a note on the deal Wednesday, saying: "In terms of valuation at issuance, the bond looks stretched on indicated terms except at the best end of the range for investors."

"We acknowledge, however, that the European convertible market supply/demand dynamic is currently very supportive, especially for index-qualifying bonds. Net supply YTD has recently turned negative following a number of conversions and redemptions of existing bonds. Also, there are very few other outstanding balanced convertibles in European food retail," the convertibles analysts wrote, citing the £190 million Sainsbury 4.25% due July 2014 as the other food retail convertible.

"Until these factors change, we expect this exchangeable to trade well above its theoretical value. At the time of writing it is indicated at about three points above issue price, which is stretched in our view. On worst indicated terms for investors, where we expect this bond to price, its current level equates to a yield of about 1.7% to the put date," the analysts wrote.

Rallye's holding in Casino at end-June 2013 was 48.9%, according to Casino's first-half financial statements, with 59.8% of voting rights, the analysts said.

Proceeds of the Rallye exchangeable will be used for general financing, according to the company's release.

The bonds are non-callable until Oct. 17, 2017 and then are provisionally callable if shares exceed 130% of the conversion price for a specified period. The bonds may be put on Oct. 2, 2018.

BNP Paribas, Deutsche Bank and the Royal Bank of Scotland were joint bookrunners of the offering, with co-managers Credit Agricole CIB, Natixis and Societe Generale CIB.

Paris-based Rallye is a food and sporting goods products distributor.

Casino is a food retailer based in Saint-Etienne, France.

Portfolio reaches higher

Portfolio Recovery's 3% convertibles due 2020 traded at 116.625 bid, 117.375 offered versus an underlying share price of $60.38 in late Wednesday trading, compared to 115.625 bid, 116.375 offered in the early going, a New York-based analyst said.

Portfolio priced $287.5 million of the notes in early August.

Barclays convertibles analysts, based in New York, wrote in a note Wednesday that the bond is attractive for outright holding.

The convertibles are trading with a current yield of about 2.6%, a premium of 26.4% and a 75% delta "offering balanced exposure to a reasonably valued small-cap growth name," the Barclays analysts said.

They recommended it for its risk-controlled equity exposure to a reasonably priced growth stock, its reasonably valued, balanced profile, low premium and risk reward profile.

Mentioned in this article:

Cubist Pharmaceuticals Inc. Nasdaq: CBST

Excelixis Inc. Nasdaq: EXEL

Maiden Holdings Ltd. Nasdaq: MHLD

NextEra Energy Inc. NYSE: NEE

Portfolio Recovery Associates Inc. Nasdaq: PRAA

Rallye SA Paris: RAL

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